Why the Fuss about Tier VI?

This past week the discussion about Tier VI has heated up and the lines are being drawn in the sand on the issue. For the average resident, one is not able to really “get in the weeds” on the dialogue however from the municipal government perch, it is interesting to watch the actions by those who are involved. Here is a break down from my perspective:

Governor Cuomo – has clearly picked this Mandate Relief item as the one to be passed in these years budget bill. Makes perfect sense as there was a sense from some that the Tax Cap on it’s own did not provide any real appreciable mandate relief to help going forward and the Governor believes that taking a stand now will save future generations of taxpayers, both at the local level and state level.

Municipal Government Organizations (New York Conference of Mayors, Towns, Counties, Schools etc) – this has been a priority with the mandate relief entities with the realization that there will be little if anything of real value in the first few years but it sets the tone and leaves a legacy that in time there will be a lid on the runaway pension costs.

Unions – The state unions have been extremely passionate about opposition of this new Tier which originally was a mild surprise to me as this proposal is to affect those yet involved in state service. To the Unions points though they represent not only current members but also those who will be future members and the fear is that a watered down pension will either draw less qualified personnel into government service or will provide a minimal pension down the road for those that survive. It is notable that non public safety pensions pale in comparison to those in public safety and many CSEA or PEF retirees, even after providing 4-5 decades of service< still continue to struggle with making ends meet albeit living a moderate lifestyle

Comptroller Dinapoli – has taken a position of opposition to many components of Tier VI, including defined contribution and the 401K component. I cannot blame him for this position since the proposed changes will draw less funding over time into the retirment fund he has responsibly managed and kept fully funded over the last several years.

The question is what does it mean to the taxpayers? Good question and it is hard to imagine however I can say this – If something was done 8 years ago we might not be paying a $1.4 million bill vs the $40,000 bill we had way back then. Additionally public employers may have been able to afford maintaining positions that where cut and/or raises that have been voided if only some pension changes where effectively put into place.

In Cohoes, the average employee making $50,ooo in 2004 would have cost us maybe $300-400/yr in pension costs back in 2004. Today, that employee costs us $9,000 additionally for retirement costs. It is not the employee’s fault however one can see that a 3% raise on $50,000k (which amounts to $1,500) pales in comparison to the $9,000 retirement commitment.

I would gladly give a 5% raise as a trade off on the pension cost and that sums up the situation pretty concisely in that it is incumbent amongst all the parties named above to collectively arrive at a fair conclusion. We have to solve this issue as time has wasted already and so has taxpayers money.

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However, the average taxpayer doesnt know Tier I from Tier XI (and why does NYS use roman numerals by the way?)

Tier XI is based more upon a private sector 401K system of retirement. Tier I retirees are in condo’s in gaited communities in Melbourne, Florida. With full Empire Plan health insurance, on the tax payers dime.

Andy has started to break the Unions. He’s not being unfair in doing so. Why should a plow driver get a Tier I retirement package when a private sector worker has to retire to Medicare?

The reason why DeNapoli doesn’t want the the new pension plan is because his position won’t be in control of the money anymore, the actual employees will be. And an employee that controls their money is more apt to make more money rather than relying on someone else to handle the money in hopes that they make money.

I can only hope that the Governor continues to pressure the union with this new benefit. Other states have adopted it, why can’t NY? It appears that the unions are running the state, not the government.

I would say there’s a middle ground here. Surely Tier I and II were too generous. Not paying a dime into your pension? Give me a break. Like a lot of assumptions of the era, Tier I was founded on the idea of never-ending economic growth. But now, instead of taking the long view, the governor wants to make drastic changes for short-term problems created by the mistakes his forbears made. It’s not fair, and it does not guarantee a very bright future. Like DiNapoli says, the growth in pensions costs has to do with the economy, and once it recovers, those costs will go down. Let’s not jump to conclusions. Tier V seems a reasonable middle ground to me. Employees pay 3% for their entire careers. I say Let Tier V work. It was only instated in 2010. Tier IV lasted 26 years before they replaced it.

You point out the key issue Mayor, even though I suspect neither you nor anyone supportive of Tier VI will notice it.

“In Cohoes, the average employee making $50,000 in 2004 would have cost us maybe $300-400/yr in pension costs back in 2004.”

In what universe does it seem like it’s feasible to pay $300-$400 a year to pay for a pension for someone? Answer: Not this universe. The problem is complex, but a large part of the issue is basically almost a decade of ultra-low payments into the plan, because it was “overfunded”. In this case, you show you contributed less than 1% of an employees salary to pay for their pensions. Even people in the private sector know that simply isn’t workable. During the almost decade of ultra-low payments, had there been a floor – of say 3% of salaries or so – localities would not be seeing such high spikes now. This is also why Tier VI proponents can argue the statistic that rates have risen so dramatically over the last few years, because prior to that, the rates were practically 0.

Additionally, you seem to exaggerate the current cost at $9000 for an employee who makes $50ks pension. The current rate for a regular ERS employee is 12.6% for an employee in the currently in place Tier V. That would mean that their cost would be $6300, not $9000. Maybe you have some police or fire members that cost almost 20% of salaries for pension contributions based on published rates, but most certainly not rank and file civilians on the same plan as state employees. The long term projected rate is even lower, as low as 7.3% of salaries depending on Tier and retirement plan. Conversely, per the fiscal note from OSC on Cuomos Tier VI, the DC plan that should “save” money has a long term projected employer contribution rate of 8%. All of these rates are easily accessible on the Comptrollers website for folks to view.

While I welcome debate on the merits of a DC plan or keeping and tweaking Tier V, it helps to present all of the facts to allow people to decide for themselves what makes sense. And it seems that those that support Tier VI seem to be willing to give out only small snippets of all of the facts that distort the issues and confuse the average taxpayer. The Comptroller is giving out the long term data via the fiscal note from his office on Tier VI, as is the Teachers Retirement system. The facts contained in those fiscal notes tend to tell a much different story than being told by Tier VI proponents.

I highly doubt anyone would object to further tweaking Tier V to remove the ability to use voluntary overtime from pension calculations, and I doubt anyone would object to offering a reasonable DC plan side by side with the newly tweaked Tier V so that folks who do not plan on spending a career in government have a portable plan.

Finally, given the rates, your trade off of a 5% raise now which will then compound with all future pay raises would seem to cost even more than leaving Tier V in place as it is, based on the difference between long term expected contribution rates for pensions and even the useless Tier VI DB plan where the employer pays 4% – 6% of salaries depending how the market performs and long term Tier V rates. The math simply does not work to show that such a trade off would amount to any real long term savings.

We do not have any Tier V employees as we cannot afford to hire…..Tier IV are at a higher percentage of contribution and the percentage contribution is slated to increase even more the next two – three years and that was from both the Governor and the Comptroller today

You do raise a good point about the raises. They are one part of the forumla and whereas the Comptroller sets the multiplier, we set the base amount either through negotiations or reduction in staffing or reduction in overtime. My example was illustrative as an extreme to point out that even a 5% raise is a less expensive option that the burden on increased retirement costs.

I do agree that over time we have been spoiled and have had exceptionally low rates. Unfortunately we all where lulled to sleep in the early 2000′s, especially when former Gov Pataki and Comptoller McCall encouraged several enhancements to the plans under the pretense that they would not negatively impact the rates. Unfortuantely the market really soured and therefore we are dealing with the hands we have been dealt

I’m not sure I follow you Mayor. Are you saying because you don’t have the money to hire anyone into Tier V, you need a Tier VI? I fail to see where that resolves your issue, because if you don’t have the money to hire, you don’t have the money to hire. Tier VI won’t fix that – especially not with the small difference in contribution rates between the two.

I also don’t follow you clearly on the raises issue somehow saving you money. It’s a matter of simple arithmetic there. If the current employer contribution rate is 12.6%, and the DC plan will lower that to 8%, by giving your employee a 5% raise in salary, that will increase pension costs by 5%, meaning that 8% cost just became a 13% cost increase compared to their previous salary. As rates start to go down in another year or two once the market problems from the recession cycle out of the 5 year rolling average used to calculate rates, that gap will only get larger, not smaller, meaning long term, it will quite possibly cost your taxpayers more, not less.

Finally, I agree with you that pension costs should be smoothed out. However, doing so will mean that during prosperous years, politicians – both at the state level and the local level – would have to have the fiscal discipline to keep funding the plan with a minimum amount (say 3% – 4%), even if it means the plan is “overfunded”. It’s that “overfunding” that would allow for fewer spikes and less severe spikes.

Honestly mayor, like a great number of politicians discussing this issue, it sounds like you may not completely understand how it functions – just as Comproller DiNapoli said the other day. It’s understandable. The system is complex. However, I would highly recommend getting information on how the system truly functions and it’s long term costs (for both the current plan and the proposed plans) before deciding to simply follow along with the governor, because in the long run, it does not appear the governors DC plan will result in any significant cost savings over time. He seems to be basing almost all of his savings on employees choosing his new DB plan, and looking at the two, a prudent person would have to avoid the DB plan in favor of the DC plan – and I suspect that’s exactly what Cuomo is trying to do.

Finally, once people start taking DC plans, I would expect turnover to be far higher, especially for positions that require more education, because the more education an employee in government tends to have, the larger the pay gap is between the public sector and the private sector. You might be able to offer a city lawyer $80k, and they might take it along with that DC plan. But chances are, they will jump ship if an offer comes up elsewhere for $100k, and thanks to the civil service system, you can’t match that new offer to try to get them to stay.

Another caveat is that the DC plan offers no disability protection whatsoever, and if your city is anything like the state, you are also not participating is NYSDI, which means employees will need to provide their own disability insurance or go without. Private sector employers, to my knowledge, MUST participate in NYSDI, so their employees have a modicum of coverage even if they do not purchase their own.

There is a tremendous amount of information to consider, and I think when looking at all of the information, Tier VI becomes less of a bargain. Personally, I think we’re better off tweaking Tier V to remove all overtime from FAS calculations and offering a TIAA-CREF style plan side by side with the tweaked Tier V as an option, while asking the legislature to pass legislation that mandates a reasonable floor on Tier V DB plan contributions so we never again see irresponsible rates hovering around 0%. This seems to be a win-win, as both plans should have long term costs around the same amount, career civil servants will still have access to reasonable pensions, and transient employees who come and go from the public sector will have something portable.

The more pressing current issue I see for most localities is twofold: exploding health care costs (which are generally far larger than pension costs on most budgets I see), and usage of massive amounts of overtime by public safety officials. As I believe localities can now “buy-in” to the Empire Plan from the state if I’m not mistaken, that can help with the first issue. Overtime management is more complex and is an issue that varies from locality to locality, because in some places, so much overtime is used that it could very well pay for more employees, which would result in less O/T usage, and in other localities, using O/T actually saves money over new hires.

Regardless, good luck. These are all very, very difficult issues, and we all know budgeting isn’t easy in this day and age.

Mr. Mayor, I’m disappointed. I’ve given you quite a bit of information here, and yet, it appears you signed on to the governors form letter and mailed it off to your state officials.

To point out what I pointed out on CapCon: Your form letter claims $17 million dollars in savings over 30 years. In the grand scheme of things, over that 30 years, how much is that really?

Well, looking at the Open Government website from the Office of the State Comptroller, the city of Cohoes had expenditures of $27,359,926 for 2010, the last year data is available for. Looking at all spending from 2005 – 2010, city spending increased about 5% a year on average.

Assuming the city never breaks the tax cap, and therefore, only increases spending by 2% a year for the next 30 years, based on the amount spent in 2010, the city will cumulatively spend $1.159 billion over the next 30 years. And again, that is considering that the city never increases it’s spending any more than the 2% tax cap.

So, in the grand scheme of things, the city will save about $17 million out of $1.159 billion in spending. The savings equates to approximately 1.4% of spending over this 30 year period based on the assumptions, and none of it will materialize at all until you hire people into Tier VI. Additionally, the vast majority of the savings will come on the back end of the 30 years, after current, lower tier employees have retired.

That is hardly a windfall, nor does it support the “unsustainable” rhetoric so loosely thrown around by Tier VI supporters and as written in your letter. And this all goes without challenging the savings estimate based on the information contained in the fiscal notes as I explained in my previous posts, which tend to show that there may very well be no savings at all, and instead, a slight increase in costs instead.

Perhaps I’m missing something here Mr. Mayor. But as it stands, based on the information available, it seems you being just a bit disingenuous with your taxpayers. It appears Tier VI will be saving them next to nothing while significantly lowering the retirement income of your future employees – the people that the people of the city will be relying on to meet their needs and provide the services those citizens expect.

Once again Mr. Mayor, I urge you to take a look at all of the facts and reconsider your position, because it does not seem to be based on a detailed analysis of the numbers involved.

There is much involved in the numbers as you very well know. The 2010 numbers are a tad bit misleading as there is a $8 million capital project in there and therefore our average annual spending is in the $20 million/year range.

I could only hope that we can stay beneath the tax cap in the next 30 years but that is almost impossible UNLESS there are meaningful mandate relief proposals passed and/or there is a significant recovery of the econonomy (not betting on that too soon).

I am impressed by the efforts to save those that are not even into the system and it is admirable. Sadly pension costs for the last decade have caused us to cut back and eliminate other former union members position as well as non-union and therefore we have this dilemna – affect those in the future (who will have their time in a decade or two to alter the Pension Tiers just as their predecessors have) or recognize that all of us, both government and private sector, are living in different times.

It stinks either way and there is no solid solution that everyone can rally behind for this reason – we are still discussing this!

Let me see if I can put things in perspective about myself and many others and why we are fighting against pension “reform”. You and the governor seem to be under the mistaken impression that this is simply about saving pensions for future government employees, and that we should simply roll over on it because hey, it doesn’t effect us. That is not the case.

You see, unlike the governor, I’m a real Democrat. A progressive. A true liberal. This pension fight goes to my core beliefs – that EVERYONE deserves a secure retirement. The fight isn’t about only maintaining pensions for government employees – it’s about bringing them back for everyone else as well, and allowing everyone to be able to live the middle class life our parents and grandparents were able to enjoy with a secure future in front of them. The fight against Tier VI and the fight to bring back pensions overall to me is simply a battle in a much larger war to bring the middle class back to prominence and prosperity again. While I am not an “Occupier”, a large part of their message rings true, and pensions (or lack thereof) are a mere part of the overall income inequality we now see in this nation.

But back to the subject at hand.

Even if we remove your capital expenditure, the city will still spend almost a billion over the next 30 years if it averages spending increases at the tax cap. So removing the capital expenditure doesn’t change the original equation much, which means, there is still little savings over time. It is basically impossible to argue with the numbers on this.

While you are stating that pension costs are “crushing” the city budget, they haven’t even risen that much over time, once again, based on published information on the Comptrollers website. In 2005, well before the recession, pension costs for the city were $1,038,358. In 2010, the last year data is available for on OSCs site, pension costs were $1,190,164. In essence, this means they’ve been rising at a rate of about 2.5% per year. This hardly supports the “unsustainable” rhetoric. Even in 2004, the year you stated the city paid “$300-400/yr for an employee making $50k” in your original post, the city paid just under $1 million for them. Where is this huge “unsustainable” increase?

At the same time, the city spent $2,339,447 on health insurance in 2010 – almost twice what it spent on pensions, and it spent $1,051,231 on various employment taxes (FICA, etc). Given that the city spent almost twice on health care what it spent on “unsustainable” pensions, I wonder, when are you going to lobby the governor to work on legislation to work on bringing the cost of health care down in this state? It is extremely high because of… government mandates on insurers. This shows that the mandate argument is a red herring if you aren’t also pushing for reform just as hard on that front. And as neither you, the governor, or any other Tier VI supporter is doing that, it goes to sow the mandate relief argument used as a smokescreen, especially since there ultimately will be little to no savings even under Cuomos plan.

I disagree with you that there are no solid solutions. As I’ve said elsewhere, I doubt anyone would take issue with tweaking Tier V to eliminate pension padding, which would go a long way to bringing down the cost of pensions, especially for localities. The Comptroller has allowed many localities to amortize their pension costs, helping to alleviate the issue RIGHT NOW – not years in the future as is needed with a new tier. Additionally, I have been informed that the legislature did pass legislation a few years back that set a floor of 4% for pension contributions, so we will never again see the irresponsible near 0% rates of the past. This will help smooth pension costs in the long term, as the trust fund will end up “overfunded” during the next bull market, leaving a cushion for the inevitable bear market that will follow it (hey, we all know the stock market works in cycles).

I’m not trying to beat you up over this Mr. Mayor. Quite honestly, it doesn’t seem that anything I say will have much effect on you, because it seems your position is a political one. It has to be political, because the math is just not there for this to be a position based on review of available data. However, I believe the citizens of Cohoes (and the rest of the state for that matter) deserve to hear both sides of the argument, and that isn’t happening with the bully pulpit the governor is using.

If your position on this is simply based on a desire for mandate relief overall, perhaps you could post on here a local analysis of all mandates on the city and their individual costs, because we all know there are far more mandates than simply pension contributions. If an analysis of these mandates and their costs has not been done, it further illustrates that the complaints about pension “mandate relief” are selective and downright political in nature.

And of the mandates that are out there, having to fully keep up with a future liability like pensions is a mandate that actually makes sense. It’s not like people with 401ks stop paying them for years only to make one large deposit from time to time – it defeats the purpose of allowing the investments to grow and fund the majority of the plan, doesn’t it? Even a neophyte investor knows that if you are trying to reach a goal of $X saved by Y date, the earlier you put funds in, the more those funds will compound, and the less the overall cost to you as an investor will be.

Most of us on this side are willing to have a dialog Mr. Mayor. But we expect that dialog to be based on actual information and not hyperbole like the governors misleading cries of “unsustainable” seemingly every 5 minutes.

Interestingly enough Mayor, the Comptrollers website does not agree with you on that $40k figure for 2004. Not by a longshot. As I said, they reflect a figure just below $1 million for 2004. $947,702 to be exact. That’s a long way from the $40k you claim it was. Additionally, OSC reflects that pension contribution rates for 2004 were slightly under 6% for both the ERS and the PFRS.

“Wow….I am definitely overmatched in this debate.”

The sarcasm is not needed. If OSC has their numbers wrong, feel free to point it out. But for the life of me I cannot figure out why OSC would have their 2004 figure incorrect. Perhaps you are thinking farther back. For example, in 2001 the city paid $54,500 – and that was back when the rates were below 1%. I see no year going all the way back to 1998 (the earliest year on record on OSCs site) where the city paid $40k. The lowest year on record was 1999, where the city paid $53,700 – again rates were irresponsibly below 1% that year.

I would agree however that it appears that there may be a compromise in the works. However, I wouldn’t say it’s tolerable until I hear the details. As I have said, I’m all for adding a reasonable, optional 401k style plan for those that may not want a pension. However, I am unwilling to destroy reasonable pensions in the process and still feel we should be working to bring them back as the primary retirement vehicle for most. 401ks were never intended to be primary, they were meant to supplement pensions (specifically, they were created to supplement the pensions of well paid corporate executives). Reform is fine, like removing OT from the FAS, provided it’s reasonable and prudent. Ultimately, just like everyone else, I am a taxpayer, and I don’t want to pay for the abuses either. But ending such abuses is where I draw the line on what would be reasonable reform.

Thank you for the debate. I’m glad we could have a reasonable exchange on this subject. That’s something many politicians don’t seem to want to do, and I commend you for that.

My comments on overmatched are a compliment. It is clear that you are very well versed and enthused on the dialogue and like everthing we experience, I continue to learn more.

I agree – the compromise is around the corner. Stopping the abuses are critical and I believe there is unified sentiment around this effort. As for the 401k- interesting concept. Being a private sector person I am used to it and am comfortable however there are many that look at this similar to privatizing social security. I think the key word OPTIONAL however I expect the 401K component, which has grabbed all of the attention in this piece, will be watered down a bit when the dust settles.

Thank You

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